I&E Forex Window: From scarcity to surplus


Prior to the introduction of the Investors’ and Exporters’ (I&E) FX window in April, last year, by the Central Bank of Nigeria (CBN), the market and exchange rates were in turmoil. But, in dramatic turn of events, the acute shortage of foreign exchange, which businesses and individuals grappled with, has turned to surplus of dollars in the market with banks now desperately looking for forex buyers. 

COLLINS NWEZE writes that the I&E Forex window has not only brought stability into the market, but it has strengthened confidence of foreign investors in the domestic economy.

THEY wound up their operations and relocated to more investment-friendly environment. No thanks to the crash in crude oil prices that resulted in the depreciation of the Naira.

But, barely a year after their exit, the foreign investors are returning to the Nigerian market. The attraction is the Investors’/Exporters’ Forex (FX) Window introduced by the Central Bank of Nigeria (CBN).

The window, which offers investors the opportunity to sell dollars at rates of their choice provided they find willing buyers, has restored confidence to the forex market.

Before the introduction of the I&E Forex window, the local equities market and the foreign exchange (forex) market were in shambles.  The All Share Index (ALSI) was continuously shrinking and the naira weakened against other currencies, especially the dollar.

The introduction of the window was followed by continuous interventions by the CBN which enabled banks and Bureau de Change (BDC) operators to meet forex demand at the retail end of the market.

The window may have become a life-saving pill for the domestic economy as it has attracted over $20 billion into the market, enhanced transparency and made forex available to the end-users.

The operations of companies, especially manufacturing, has been on the upward swing with an improvement in inflation figures as well as equities market performance.

In April last year, the CBN opened a special forex window for investors and exporters.

According to the CBN Director in charge of Financial Markets, Alvan Ikoku, the “Investors’ & Exporters’ FX Window” is boosting liquidity in the forex market and ensuring timely execution and settlement for eligible transactions by all parties.

Before the stability in the forex market and naira, the economy witnessed a depressed Gross Domestic Product (GDP) growth, which culminated in a recession in 2016. There was also rising inflation, which peaked at almost 19 per cent in January 2017 and a persistently rising unemployment rate to 14.23 per cent in 2016 fourth quarter from 6.41 per cent as at 2014 fourth quarter. There was also a significant depreciation of the exchange rate, reaching N525 to $1 in February 2017 and witnessed a fast depletion of the reserves which was drained down from about $23.6 billion in October 2016 from as high as $40 billion in January 2014.

The I&E Forex window, seen as a ‘willing buyer, willing-seller window’, allows foreign investors to bring in dollars into the economy at any price of their choice, provided they could find buyers at such rate. The figure at the window has also impacted positively on the Purchasing Managers’ Index (PMI).

Lagos-based economist and Managing Director, Financial Derivatives Company Limited, Bismarck Rewane said the introduction of the I&E forex window was arguably the most important policy implemented by the CBN in 2017.

He said: “Prior to this, investors were of the view that the naira was overvalued and not at a market-determined level. The I&E FX window, higher oil prices and production, and the CBN’s consistent intervention in the forex market are the main drivers of the stability and the convergence of exchange rates in Nigeria today.”

The Global Markets Group Head at Access Bank Plc, Dapo Olagunju, said the window allows investors to sell dollars at any rate they choose and is expected to help bring investors’ confidence into the market.

He said: “Investors/Exporters FX Window helps participants execute deals as based on their own market agreement. Today, both the dollar demand and supply sides are beginning to talk to each other and there is likely to be rate convergence soon.”

A report by Exotic Capital, an investment and research firm, titled: ‘Fragile Recovery, Positive Outlook’, said that Nigeria’s forex regime, although still far from ideal, has begun to stabilise.

It said: “A multiple currency regime evolved after the oil price all in 2014 and the June 2016 devaluation, which led to a widening divergence between the official and parallel markets (the parallel market premium reached 100 per cent in January 2017).

“The current regime has shown a vast improvement this year with introduction of the I&E Forex window last April.”

It said the parallel rate for the naira, in the range of N360 to N365, is nearly identical to the I&E Forex window rate, used for international investors as well as importers and exporters, and has seen close to $20 billion in cumulative transactions since its introduction.

Commenting on the issue at the Access Bank forex seminar, Rewane stated that the creation of the this window was a good move on the part of the CBN as it will lead closer to the emergence of a Real Effective Exchange Rate (REER) for the country.

He said: “Any measure that increases the supply of forex and the number of suppliers will help to reduce the dominance of the CBN as the major supplier of forex in the market and move us closer to the emergence of a Real Effective Exchange Rate. This will attract more investors and lead us closer to a perfect market.”

Barely a month after trading at the window commenced, international credit rating agency, Fitch Ratings, released a report, stating that the establishment of the I&E Forex window had led to an improvement in banks’ forex liquidity situation.

Today, the naira remains stable at the official and parallel markets, with the foreign exchange (forex) reserves standing at $46.9 billion, a report by Exotic Capital, an investment and research firm, has said.

The report said although the level of reserves was still below the record high of $64 billion realised in August 2008, it has nearly doubled the $24 billion recorded in October 2016, increasing by more than $22 billion in 15 months.

The reserves hit $46.7 billion on March 29 from just over $23 billion in October 2016 and the economy continued to attract huge investment inflows from foreign investors.

The economy benefited from increased forex supply with over $20 billion inflow to the I&E window since inception in April 2017.

“We have written extensively on Nigeria’s multiple exchange rate system and will abstain from further discussion at present, suffice to say that a fairly valued naira at 360 to the dollar combined with high domestic rates has led to a tremendous increase in the level of gross foreign reserves held at the CBN,” the report said.

A similar report by FBN Capital, entitled: “Towards the $50 billion threshold, and counting”, said the rapid accumulation of $15.96 billion over 12 months was due to two sizeable Eurobond launches, a small diaspora bond issue, the recovery in oil export revenues (through the Nigeria National Petroleum Corporation’s share of production and, more recently, the steady bid by the CBN at the I&E Forex window.

The FBN Capital said: “We should stress that the data are gross and mask the swap transactions the CBN has entered into with local banks. The steady bid by the CBN has been seen variously as a response to the softening of demand for forex by importers and other economic actors, and as a move to contain naira appreciation.

“The CBN will be pleased with the healthy signals from I&E Forex window where the weekly average has now settled above $1 billion.”

Speaking on the issue, CBN’s Acting Director, Corporate Communications, Isaac Okorafor, reiterated the bank’s commitment to ensure adequate forex supply to genuine customers to achieve the goal of forex rates convergence.

Managing Director, Afrinvest West Africa Plc, Ike Chioke, said the window has won the confidence of foreign investors. He said the window attracted foreign investors’ appetite for Nigerian assets leading to impressive appreciation in the equities market and stabilising the naira.

Before the introduction of the window, foreign investors’ appetite for local assets waned significantly on the back of currency crisis which in turn fundamentally weakened macroeconomic performance, dragged corporate earnings and also impacted on equities market viability.

According to the CBN, forex supply to the window shall be through portfolio investors, exporters, authorised dealers and other parties with foreign currency to exchange to naira.

The apex bank is a market participant at the window to promote liquidity and professional market conduct. The apex bank assured that the exchange rates of the transactions would be as agreed between authorised dealers and their counterparties.

The regulator also reserved the right to intervene as a buyer or seller, as it deems fit, in the window, even as information on transactions between authorized dealers is reported to the CBN on a daily basis.

Manufacturers and other foreign exchange (forex) end-users also seem to be having a great time over the coming of the window.

The improved access forex by local manufacturers is positively impacting on the economy as the manufacturing sector, which was in comatose for nearly two years, has been upbeat in the last three months.

The Purchasing Managers’ Index (PMI) survey report released for last month by the CBN has continued to show improvements in business and investment sentiment.

On some of the stabilisation steps taken by the regulator, CBN Governor Godwin Emefiele said the apex bank has opened the market up for more people to come in.

Emefiele said: “We want more people to come and invest in the economy, and that was why we introduced the Investors’ & Exporters’ Window. We want a forex market that will be determined by demand and supply. It has helped in forex flow and led to the appreciation in the naira we are seeing today.”

The Global Markets Group Head at Access Bank Plc, Dapo Olagunju, said the new window allows investors to sell dollars at any rate they chose and that it is expected to restore investors’ confidence into the market.

He said: “Investors/Exporters FX window help participants execute deals as based on their own market agreement. Today, both the dollar demand and supply sides are beginning to talk to each other and there is likely to be rate convergence soon.”

The CBN has maintained its weekly intervention in the forex market has continued. The bank intervened this week in the forex market with $210 million injection into key segments of the economy.

Analysts said that the introduction of a new forex window for investors and exporters targeted at increasing forex supply in the market and allowing the timely settlement of transactions helped achieve the current exchange rate stability.